Does Carbon Risk Matter in Firm Dividend Policy? Evidence from a Quasi-natural Experiment in an Imputation Environment

Abstract

We examine the role of carbon risk in dividend policy, and how its effect varies between imputation (paying franked dividends) and classical (paying unfranked dividends) tax environments in the unique experimental setting in Australia. We find that the probability of paying dividend and dividend payout ratio is lower for firms in the highest-emitting industries (polluters) relative to non-polluters, subsequent to ratification of the Kyoto Protocol. While the post-Kyoto reduction in the likelihood of paying dividend is not significantly different, the reduction in payout ratio is smaller in the imputation environment than classical tax system, highlighting the significance of imputation tax environment only on the impact of carbon risk on dividend payout rather than decision to pay. We further document that the post-Kyoto reduction in dividend payout of polluters is driven by their relative increase in earnings uncertainty. The evidence suggests a causal influence of carbon risk on firm dividend policy.

Keywords: Dividend policy; Earnings uncertainty; Carbon risk; Imputation tax system; Franked dividend

JEL Classification: G35, Q51, Q58